Friday, October 30, 2015

Many of us have either
heard very little about or are unaware of an Executive Branch agency that exists with the
"mission of supporting American jobs by facilitating the export of U.S.
goods and services". In this era of declining manufacturing in
America, this agency sounds like a great thing, unless it costs taxpayers more
than it provides.

EXIM
also known as the Export-Import Bank of the United States, was formed in 1934
by the Roosevelt Administration with the initial goal of providing funding to
the Soviet Union and Cuba. In fact, the first loan issued by EXIM was to
the nation of Cuba so that it could purchase $3.8 million worth of
silver ingots from the United States. It became an independent agency on
July 31, 1945 and became a self-funding federal government agency in 2007
although all loans are still backed by the federal government, otherwise known
as the American taxpayer. One of the requirements of EXIM is that it be
reauthorized by Congress every four or five years and, on September 19, 2014,
under House Joint Resolution 124, the operating
authority of the Export-Import Bank was extended until June 30th, 2015.
Since July 1, 2015, this is what has been displayed on the EXIM
website:

Since July 1, 2015,
EXIM has lost its authority to issue new loan guarantees to foreign
purchasers of American goods.

While EXIM's primary goal
is to basically create jobs in the United States through the manufacturing and
exportation of American-made goods by guaranteeing loans for foreign purchasers
of said goods (and services), its operation has been questioned by many
analysts. This is particularly the case for Boeing, a major player in
the world's aircraft manufacturing industry. EXIM, sometimes referred to
as "The Bank of Boeing" is a major backer of Seattle,
Washington-based Boeing as you can see on this diagram from the Mercatus Center:

On top of that, according
to a recent article by Veronique de Rugy, EXIM
reached out to Boeing for assistance in drafting new bank rules that were to be
put in place to ensure that its loans take into consideration the negative
impact that they have on non-subsidized American companies. To see how
distorted EXIM's disbursements have become, here
is a table showing the state rankings for EXIM's disbursements between 2007 and
2014:

Not surprisingly, the
state of Washington is by far the biggest beneficiary with total EXIM
disbursements of $50.63 billion which means that 22.67 percent of the state's
total export value being supported by EXIM. As well, you can see that
small businesses really get the short end of things; only $57.06 billion worth
of small business exports are supported by EXIM out of the total of $235.62
billion worth of exports which were supported by EXIM between 2007 and 2014. In the case of Washington, a tiny 1.03 percent of EXIM disbursements went to small businesses.

Now that we have a bit of
background, let's look at the present. On October 27, 2015, Roll Call 576
took place, voting on House Resolution 597. This vote received relatively
little coverage by the mainstream media. For your information, here is the text of H.R. 597, otherwise known
as the Export-Import Bank Reform and Reauthorization Act of 2015:

Given that the continued
existence of EXIM is critical to Boeing, let's look at how much money Boeing has spent trying to
convince Washington of its viewpoint on many issues since 1998:

So far in 2015, Boeing
has spent $16.755 million on lobbying in Washington, compared to $15.23 million
in 2014 which put it at number 10 out of 3514 lobbyists, and could well
set a "personal best" this year. When it comes to all lobbying on trade, in 2015, Boeing has spent
the fourth highest amount, following Wal-Mart, Big Pharma and the United Parcel
Service. On top of that, Boeing spent $3.253 million on campaign
contributions in the 2014 cycle, benefitting these individuals and many more:

Current Democratic
presidential candidate Hillary Clinton has even offered her opinion on EXIM at a recent speech in New
Hampshire. She called for "speedy reauthorization of the
Export-Import Bank". As well, back in November 2014, she stated the following:

“Thank you for mentioning
the EXIM Bank, because I’m a very strong supporter of the EXIM Bank, because
it is a tool for us to be competitive in order to support our businesses
exporting. But there are those who wish to end the role of the
Export-Import Bank, and it’s not based on evidence, it’s based on ideology.”

In contrast, her main
competitor, Senator Bernie Sanders, issued the following statement after the Senate voted on
an amendment that would see EXIM reauthorized for five years back in June:

"At a time when almost every major corporation in this
country has shut down plants and outsourced millions of American jobs, we
should not be providing corporate welfare to multi-national corporations
through the Export-Import Bank.

Instead of
providing low-interest loans to multi-national companies that are shipping jobs
to China and other low-wage countries, we should be investing in small
businesses and worker-owned enterprises that want to create jobs in the United
States of America. If the Export-Import Bank cannot be reformed to become
a vehicle for real job creation in the United States, it should be eliminated.”

Now that H.R. 597 has
passed the House, it will be interesting to see whether Boeing has spent
sufficient lobbying money to ensure that the "Bank of Boeing"
receives the final stamp of approval, ensuring its continued existence for the
near future. With the Republicans and Democrats being split over EXIM, its future is certainly uncertain.

Thursday, October 29, 2015

Now that the Federal Reserve has once again left investors baffled about their interest rate intentions, I wanted to take another look at an issue that may tie the Fed's "hands" for the foreseeable future. Stuffed away in the Bank
for International Settlements Quarterly
Review dated September 2015 is some interesting information
regarding the global debt situation. As many of my long-term readers
are aware, debt is a regular subject on this blog and this data from BIS shows us all how the
global debt situation has reached the danger point.

Let's start this posting
by looking at a couple of definitions:

1.) Market value
of debt is the amount for which a creditor (in this case, a nation) could
exchange assets or settle a liability at any moment in time. Market
values tend to fluctuate significantly.

2.) Nominal value of debt
is the amount that at any moment in time the debtor (in this case, a nation),
owes to a creditor plus the amount of interest owing. This amount is stable from the
time of debt issuance until it is fully repaid, unless accrued interest has not
be paid.

Now let's look at how the
nominal (in blue) and market (in red) values of the core debt as a percentage of GDP of key advanced economies have changed since 2007:

For your information, the
green bars represent the valuation effect (right-hand scale) which are
estimates of the difference between the reported market and nominal values of
the debt. For given changes in market interest rates, the valuation
effect increases with the duration of the debt instrument.

As we can see from the
graphs above, the debt levels for all nations have risen substantially since
the beginning of the Great Recession. In fact, here is what has happened
to the nominal debt levels of European nations, Canada, the United States and
Australia as a percentage of GDP between the end of 2007 and the end of 2014:

On average, the
debt-to-GDP ratio for these 12 advanced economies rose from 63.2 percent in
2007 to 108.3 percent in 2014, an increase of 45.1 percentage points.
Even the European debt transgressors of Italy, Portugal, Spain, Greece
and Ireland have seen substantial increases in their debt levels despite their attempts to rein in their budgetary deficits. The
only thing that is saving these nations (and others) from total fiscal ruin are
today's ultra-low interest rates on their debt instruments as shown on this
graph which shows the yield on ten year bonds:

Let's close this section
with a graph showing how the debt-to-GDP ratio for sovereign debt has changed
since 2000 for both emerging economies (in yellow using left-hand scale) and
advanced economies (in red using right-hand scale) with the shaded area
representing the 25th and 75th percentile across all of the nations in the
sample and the vertical line representing September 15, 2008:

Now that we've looked at
a bit of detail on government debt, let's look at what has happened to the debt
of households in both emerging and advanced economies with the same colour
scheme as above:

Here is a graph showing
what has happened to non-financial corporate debt as a percentage of GDP since
2000, again, with the same colour scheme as the earlier graphs:

Lastly, here is a graph
showing what has happened to total non-financial debt (including government,
household and non-financial corporate debt) since 2000 with the same colour
scheme as used above:

Here is a table showing
the core debt of the non-financial sectors, including government, households
and corporations (non-financial) and how much that debt has changed as a
percentage of GDP between the end of 2007 and the end of 2014 for both advanced
and emerging economies:

Between 2007 and 2014, on average, among advanced economies, total non-financial sector debt as a percentage of GDP rose by 36 percentage points to 265 percent compared to 50 percentage points and 167 percent for emerging economies. Looking in more detail we find that among advanced economies,
the largest growth in non-financial sector debt as a percentage of GDP was
found in Japan (77 percentage points), followed by France (72 percentage
points) and Italy (53 percentage points). As well, Japan has the
highest total non-financial sector debt as a percentage of GDP at 393 percent,
followed by Sweden at 295 percent and Spain at 293 percent. Among
emerging economies, the largest growth in non-financial sector debt as a
percentage of GDP was found in Hong Kong (103 percentage points), followed by
China at 82 percentage points and Singapore at 59 percentage points. As
well, Hong Kong has the highest total non-financial sector debt as a percentage
of GDP at 287 percent, followed by Singapore at 242 percent and China at 235
percent.

This data quite clearly
shows us how the world, both advanced and emerging nations, has levered up
during the period since the beginning of the Great Recession. Rather than
using the period of economic growth to reduce debt levels, governments,
corporations and households have been lured into taking on additional debt,
debt that will haunt all of us when the next recession arrives. Thanks to
the world's central banks, most particularly the Federal Reserve, we are now hooked on what has the appearance of cheap credit.
With the global economy slowing, these high levels of debt will prove to
be a drag on future economic growth, showing us that the long-term economic impact of
ZIRP, QE and other imaginative tools used by the world's most influential central banks since 2008 are effectively zero and may net out to be far worse than nothing and that the Federal Reserve has successfully tied its own hands when it comes to its future interest rate policies.

Tuesday, October 27, 2015

A recent letter from
Iran's Ayatollah Ali Khamenei to Iran's President Hasan Rouhani sheds light on
his verdict about the recent Iran/P5+1 nuclear deal. Before we look at
the letter, I'd like to provide you with a bit of background on Iran's political
landscape which will show you how important any pronouncement from the
Ayatollah is to the people of Iran.

For those of you who
aren't aware of the division of power in Iran, Ayatollah Khamenei is the
Supreme Leader of the nation and is appointed and supervised by the publicly-elected Assembly of Experts. In post-revolutionary Iran, there have been
only two Ayatollahs, the infamous Ayatollah Ruhollah Khomeini and his
successor, the current Ayatollah Ali Khamenei. The Supreme Leader is
considered to be the head of state and is in charge of Defense, Religious
Affairs and the Guardian Council of the Constitution, an appointed 12 member
council that is charged with interpreting the Constitution of Iran including
the supervision of elections and the appointment of candidates. One of
the key jobs of the Supreme Leader is his right to appoint the commanders of
the armed forces, the heads of the nation's major religious foundations, the
members of the national security councils that deal with defence and foreign
affairs, the nations chief judge and prosecutor and the director of the
national media (think propaganda outlets).

Next in line, the second-most powerful person in Iran is the President. This person is elected by
free vote for a four year term. Any candidate running for president must
be approved by the aforementioned Guardian Council of the Constitution which is
led by the Ayatollah. The President is responsible for the duties that
fall outside of the responsibilities of the Ayatollah including the implementation
of Iran's constitution and the exercising of executive powers including the
appointment of government ministers within the Islamic Consultative Assembly,
commonly referred to as Iran's parliament. It is important to note that
while the President may appoint the Minister of Defense, the appointment must
be approved by the Supreme Leader. The current president, Hasan Rouhani,
is widely viewed as a moderate compared to his predecessor, Mahmoud Ahmadinejad who was
very hawkish on his views of Israel and the United States.

Here
is a diagram that shows the complex relationship between Iran's Supreme
Leader and the remainder of Iran's elected bodies:

You can quite clearly see
that the Supreme Leader has very significant control over Iran's government
through the mechanism of appointments. On the other had, the government
as elected by the voters generally has control through the approval of
appointments. In any case, Ayatollah Khamenei has significant control over
the internal and external affairs of Iran, particularly the Joint
Comprehensive Plan of Action (JCPOA), the agreement that assures
that Iran's nuclear program will be used for peaceful purposes only.

With that background
information in mind, here is the text of a rather lengthy letter
that Ayatollah Khamenei. I have highlighted portions of the letter that
are key to understanding where Iran stands on the current iteration of the
JCPOA.

"In the Name of Allah, the Most Compassionate, the Most
Merciful

Your
Excellency, Mr Rouhani,

President
of the Islamic Republic of Iran and Head of the Supreme National Security
Council

May God
bestow success upon you.

Greetings
to You

The
agreement known as the Joint Comprehensive Plan of Action (JCPOA) has already
been cleared through legal channels following precise and responsible
examinations in the Islamic Consultative Assembly, [parliamentary] ad hoc
committees and other committees as well as the Supreme National Security
Council. Since the agreement is waiting for my view, I deem it necessary to
remind several points so that Your Excellency and other officials directly or
indirectly involved in the issue would have enough time to comply with and
safeguard national interests and the country’s best interests.

1.Before anything else, I deem it
necessary to extend my gratitude to all those involved in this challenging
procedure throughout all its periods, including the recent nuclear negotiating
team whose members tried their best in explaining the positive points and
incorporating all those points [into the agreement], critics who reminded all
of us of weak points through their appreciable meticulousness, and particularly
the chairman and members of the Majlis ad hoc committee [set up to review the
JCPOA] as well as the senior members of the SNSC who covered some voids by
including their important considerations, and finally the Speaker of Majlis and
Members of Parliament who adopted a cautious bill to show the right way of
implementation [of the agreement] to the administration, and also national
media and the country’s journalists who despite all their differences of view
presented a complete image of this agreement to public opinion. This voluminous
collection of activity and endeavors and thoughts [spent] on an issue which is
thought to be among the unforgettable and instructive issues of the Islamic
Republic, deserves appreciation and is a source of satisfaction. Therefore, one
can say with certainty that the divine reward for these responsible
contributions will, God willing, include assistance and mercy and guidance by
Almighty God because the divine promises of assistance in exchange for
assisting His religion are unbreakable.

2.Enjoying decades-long background of
presence in the very details of the affairs of the Islamic Republic of Iran,
you must have naturally realized that the government of the United States of
America, neither in the nuclear issue nor in any other issue, had been pursuing
no other approach but hostility and disturbance, and is unlikely to do
otherwise in the future either. The remarks by the US President [Barack Obama]
in two letters addressed to me on the point that [Washington] has no intention
of subverting the Islamic Republic of Iran turned out to be unreal and his open
threats of military and even nuclear strike, which can result in a lengthy
indictment against him in international courts, laid bare the real intentions
of US leaders.Political pundits and public opinion of many nations
clearly understand that the case of his never-ending hostility is the nature
and identity of the Islamic Republic of Iran, which is born out of the Islamic
Revolution. Insistence on rightful Islamic stances and opposition to the
hegemonic and arrogant system, perseverance against excessive demands and
encroachment upon oppressed nations, revelations on the US support for medieval
dictators and suppression of independent nations, incessant defense for the
Palestinian nation and patriotic resistance groups, rational and globally
popular yelling at the usurping Zionist regime constitute the main items which
make the US regime’s enmity against the Islamic Republic inevitable, and this
enmity will continue as long as the Islamic Republic [continues to] disappoint
them with its internal and sustainable strength.The behavior and
words of the US government in the nuclear issue and its prolonged and boring
negotiations showed that this (nuclear issue) was also another link in their
chain of hostile enmity with the Islamic Republic. Their deception through
flip-flopping between their initial remarks that came after Iran accepted to
hold direct talks with them and their constant non-compliance with their
pledges throughout two-year-long negotiations and their alignment with the
demands of the Zionist regime and their bullying diplomacy regarding relations
with European governments and bodies involved in the negotiations are all
indicative of the fact that the US’s deceitful involvement in the nuclear
negotiations has been done not with the intention of a fair settlement [of the
case], but with the ill intention of pushing ahead with its hostile objectives
about the Islamic Republic. Doubtlessly, vigilance vis-à-vis the
hostile intentions of the US government and instances of resistance on the part
of the officials of the Islamic Republic of Iran throughout the negotiations
managed, in numerous cases, to prevent heavy damage from being inflicted [upon
Iran]. However, the outcome of the negotiations, which is enshrined in
the JCPOA, has numerous ambiguities and structural weaknesses that could
inflict big damage on the present and the future of the country in the absence
of meticulous and constant monitoring.

3.The nine-point provisions entailed in
the recent bill adopted by the Majlis and the 10-point instructions outlined in
the resolution of the Supreme National Security Council carry helpful and
effective points which must be taken into consideration. Meantime, there are
some other necessary points which are announced here while some of the points
mentioned in the two documents are highlighted.

First,
since Iran has accepted to negotiate basically for the objective of removal of
unjust economic and financial sanctions and its enforcement (the lifting of
sanctions) is tied to Iran’s future actions under the JCPOA, it is necessary
that solid and sufficient guarantees be arranged to avoid any infraction by the
opposite parties. Written declaration by the US president and the European
Union for the lifting of the sanctions is among them. In the statements of the
EU and the US president, it must be reiterated that these sanctions will be
fully lifted. Any declaration that the structure of the sanctions will remain
in force shall imply non-compliance with the JCPOA.

Second,
throughout the eight-year period, any imposition of sanctions at any level and
under any pretext (including repetitive and fabricated pretexts of terrorism
and human rights) on the part of any of the countries involved in the
negotiations will constitute a violation of the JCPOA and the [Iranian]
government would be obligated to take the necessary action as per Clause 3 of
the Majlis bill and stop its activities committed under the JCPOA .

Third, the
measures related to what is mentioned in the next two clauses will start only
after the International Atomic Energy Agency (IAEA) announces [the conclusion
of] the past and future issues (including the so-called Possible Military
Dimensions or PMD of Iran’s nuclear program).

Fourth,
measures to renovate the Arak plant by preserving its heavy [water] nature will
start only after a firm and secure agreement has been signed on an alternative
plan, along with sufficient guarantees for its implementation.

Fifth, the
deal with a foreign government for swapping enriched uranium with yellow cake
will start only after a secure agreement has been clinched to that effect,
along with sufficient guarantees [for its implementation]. The aforesaid deal
and exchange must be done on a gradual basis and on numerous occasions.

Sixth, by
virtue of the Majlis bill, the plan and the necessary preparations for mid-term
development of the atomic energy industry, which includes the method of
advancement in different periods of time for 15 years for the final objective
of 190,000 SWU, must be drawn up and carefully reviewed by the Supreme National
Security Council. This plan must allay any concern stemming from some points
entailed in the JCPOA appendices.

Seventh,
the Atomic Energy Organization of Iran must organize research and development
in different aspects such that after the end of the eight-year period, there
would be no shortage of technology for the level of [uranium] enrichment
entailed in the JCPOA.

Eighth, it
must be noted that on the ambiguous points in the JCPOA document, the
interpretation provided by the opposite party is not acceptable and the
reference would be the text of the negotiations.

Ninth, the
existence of complications and ambiguities in the text of the JCPOA and the
suspicion of breach of promise, infractions and deception by the opposite
party, particularly the US, require that a well-informed and smart panel be
established to monitor the progress of affairs and [gauge] the opposite party’s
commitment and realization of what was mentioned above. The
composition and the tasks of this would-be panel should be determined and
approved by the Supreme National Security Council.

In witness
whereof, Resolution 634, dated August 10, 2015, of the Supreme National Security
Council, is endorsed pending the observation of the aforementioned
points.

In
conclusion, as it has been notified in numerous meetings to you and other
government officials and also to our dear people in public gatherings, although
the lifting of sanctions is a necessary job in order to remove injustice
[imposed on people] and regain the rights of the Iranian nation, economic
overture and better livelihood and surmounting the current challenges will not
be easy unless the Economy of Resistance is taken seriously and followed up on
entirely. It is hoped that this objective will be pursued with full seriousness
and special attention would be paid to enhancing national production. "You
should also watch out so that unbridled imports would not follow the lifting of
sanctions, and particularly importing any consumer materials from the US must
be seriously avoided.

I pray to
Almighty God for your and other contributors’ success." (my bold)

Ayatollah
Khamenei's greatest concern appears to be the lifting of the sanctions against
Iran by both the United States and Europe. He notes that the sanctions
must be fully listen and not just suspended and that any declaration by the
P5+1 that allows the structure of the sanctions to remain in place will be
viewed by Iran as a breach of the conditions of the agreement.
Interestingly, if we look at the actual text of the JCPOA, we find this in
section 23:

"Eight
years after Adoption Day or when the IAEA has reached the Broader Conclusion
that all nuclear material in Iran remains in peaceful
activities, whichever is earlier, the United States will seek such
legislative action as may be appropriate to terminate, or modify to
effectuate the termination of, the sanctions specified in Annex II on the
acquisition of nuclear-related commodities and services for nuclear activities
contemplated in this JCPOA, to be consistent with the U.S. approach to other non-nuclear-weapon
states under the NPT."

The United
States and its partners will not terminate the sanctions on Iran's acquisition
of nuclear commodities and services until either October 18, 2023 or when the
IAEA has determined that Iran's nuclear program can only be used for
peaceful purposes. Until then, these sanctions are merely suspended.

As well,
since, for the most part, American companies have very little access to Iran's
relatively well-off 77 million consumers, this sentence in the Ayatollah's letter is particularly
interesting:

"You
should also watch out so that unbridled imports would not follow the lifting of
sanctions, and particularly importing any consumer materials from the US must
be seriously avoided."

So much for building those MacDonald's, KFC and Starbucks on every street corner in Tehran.

From the
tone of Ayatollah Khamenei's letter, you can gain a sense of how little trust
there is between Iran and the other signing parties, particularly when he
states that "...the government of the United States of America, neither
in the nuclear issue nor in any other issue, had been pursuing no other
approach but hostility and disturbance, and is unlikely to do otherwise in the
future either." In a recent speech to the commanders and staff of the Islamic Revolution Guards Corps Navy he stated:

“Negotiations
with America would mean paving the way for infiltration [of the United States]
into the country’s economic, cultural, political and security domains...In
these negotiations (JCPOA), the opposite side sought to seize any opportunity
for infiltration and take a step against the country’s national interests. Of
course, Iranian negotiators were fully aware, but Americans finally got the
chance in some instances...Negotiation with America is banned because such
negotiation will not only have no advantage [for Iran], but will also entail
numerous disadvantages."

It certainly appears that this agreement
is doomed to failure, right from the start.

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About Me

I have been an avid follower of the world's political and economic scene since the great gold rush of 1979 - 1980 when it seemed that the world's economic system was on the verge of collapse. I am most concerned about the mounting level of government debt and the lack of political will to solve the problem. Actions need to be taken sooner rather than later when demographic issues will make solutions far more difficult. As a geoscientist, I am also concerned about the world's energy future; as we reach peak cheap oil, we need to find viable long-term solutions to what will ultimately become a supply-demand imbalance.